In August 2013, Allentown, Pennsylvania, rented its water and waste systems for 50 years because it did not have enough money to pay the pensions owed to its employees or to maintain its water system.
Allentown is not alone in turning to infrastructure privatization to deal with cash-flow problems. Indeed, Allentown is Anytown, USA, as cities, counties and states across the country privatize basic infrastructure built and paid for by prior generations. However, water is not just another type of infrastructure to be sold to the highest bidder. As NASA scientists know, water is life.

The Evolution of Building Big Things

For centuries, groups in the United States have funded and built big infrastructure. Consider barn raising. Neighbors got together, and by the end of the day, there was a new barn. Over time, everyone participated, and everyone who needed a barn got a barn.

As more complex and expensive infrastructure was needed, state, local and federal governments raised funds to pay workers and buy materials to build canals, roads, railroads and water and sewage systems. Those funds came from the equivalent of passing the hat through one-time assessments or through the regular payment of taxes. For decades, federal and state fuel taxes have paid so many cents per gallon of gasoline to fund the building and maintenance of roads. The fuel tax has provided a clear, easy-to-understand link between funding source and the end product - good highways.
How, then, today, do we have crumbling, dangerous, outdated infrastructure? Why are we now unable to pay for roads, water and other infrastructure and their upkeep and repair? Why do we have cash-strapped state and local governments desperate to use their infrastructure as a piggy bank? We still have fuel taxes. The average local, state and federal fuel tax is now 49.5 cents a gallon. However, the federal fuel tax has not been raised since 1993 and has not been adjusted for inflation.

An obvious solution would seem to be raising the fuel tax or, at least, indexing it for inflation. However, today that would lead to uneven and unfair taxation. The value of the fuel tax and who pays it have been affected by big increases in vehicle mileage per gallon, by hybrid cars, which go farther on each gallon of gas, and by non-gas-powered vehicles, which use the roads but pay no gas tax. Other laws, such as the PAYGO system, first introduced in the Omnibus Budget Reconciliation Act of 1990, halt road construction until money to build a road is available. Other options might be a tax based on vehicle miles traveled, but collecting that information and making a fair distribution for each area driven raises privacy concerns. Finally, add to these challenges the vocal anti-tax movement.

These and other problems have led state and local governments to give up on a highway revenue system that has a clear link to transportation and, instead, replace it with complex, exotic systems for doing what once was simple - collecting and using taxes to pay for good quality infrastructure. Instead, we are turning to a funding mechanism that is opaque and governed by "gotcha" contracts whose turgid wording is all but unintelligible. It is also a system whose contracts trump democratic rights and community needs.

Water is Special

Although transportation privatization has been a visible target in the United States, domestic and international water privatization are increasing in importance for reasons that should concern us all. Much of US water infrastructure has been allowed to deteriorate and now needs expensive repairs.

Water is and will continue to be a critical domestic and international issue and one that is increasingly tied to conflict. Water and quality agricultural land are becoming increasingly scarce resources as ancient aquifers around the world dry up from overuse, as water quality becomes degraded from uses such as fracking and as population growth outstrips water resources.

Water's importance can be tracked in the increasing number of films on water challenges. In the United States, the Ogallala-High Plains aquifer, which underlies Colorado, Kansas, Nebraska, New Mexico, Oklahoma, South Dakota, Texas and Wyoming, is facing a severe draw-down of water.

Although the challenges of drought and conflict were not the cause of Allentown's decision to privatize its water system, these problems are part of the context in which domestic water decisions are being made. Allentown leased its water and wastewater systems because it faced two major financial challenges. It had failed to fund its firefighter and police retirement accounts and, as with many other cities, to make critical repairs and upgrades to its water system.
Allentown estimated that its minimum obligation to fund employee pensions would take approximately 25 percent of its general fund budget. Indeed, its finances were in such poor shape that it could not qualify for loans to finance its needs. The only option it could see was to treat its water infrastructure as a piggy bank. Its hope was to secure at least $100 million in an upfront payment by privatizing its water system.

Food and Water Watch's 2012 analysis of Mayor Ed Pawlowski's announcement that he planned to privatize Allentown's water found much to criticize. FWW pointed out that the public would be "taxed through the tap" and that an upfront payment was actually an expensive loan. "Because privatized water systems generally are no more efficient than publicly run ones, the private operator would cut services or hike rates to meet its profit goals."

The bidding attracted international bidders, but by summer 2013 Allentown found its white knight in the Lehigh County Authority, a public, nonprofit body that served the county in which Allentown was situated. Even better, the LCA offered more than double the amount Allentown had hoped for - an upfront payment of $220 million and, starting in year four of the contract, an annual payment of $500,000 a year. LCA also offered to hire Allentown's workers, maintain their pay and benefits and recognize their union. In addition, the LCA was solvent and could borrow money at low terms. LCA financed its up-front payment by issuing tax-free bonds that it planned to pay off in 30 years. LCA produced an infrographic showing the basic terms.
The LCA proposed a contract for 50 years, nearly double the term Allentown had proposed, but it is not surprising that Allentown accepted the LCA bid. These governmental bodies were, after all, interdependent friends and neighbors with a shared history and relationships. The LCA's offices were in Allentown, and Lehigh County had long depended on Allentown for water. As a result, the LCA's interests were largely aligned with those of Allentown. Allentown also benefitted from this arrangement through the LCA's large up-front payment that helped remedy its immediate money woes and meet its legal and ethical obligations to its employees and citizens.

In addition, while other bidders might have taken this opportunity to increase their revenues by lowering workers' pay and benefits and breaking their union, the LCA agreed to retain the city water workers and to recognize the union that represented them, an act that promoted a peaceful commencement to this new relationship.
The 2012 FWW report showed that Allentown's annual sewer and water charges were $425 a year, while charges for privatized Pennsylvania water and sewer operations were much higher. Aqua Pennsylvania charged $1,224 a year, Pennsylvania American Water charged $1382, and the average price hikes for Pennsylvania cities that privatized their water was $516, an increase of 252 percent. One way to interpret these figures was that Allentown might have been charging too little for its water and could have addressed some of its problems by increasing its rates, while retaining control over this important infrastructure. When the details of the Allentown-LCA deal were announced, Food and Water Watch published its analysis of the contract terms and their effects.

3 Comments

Allentown and the Lehigh County Authority are public entities with many strong ties to one another. Does that mean that their public-public, 50-year infrastructure contract is different from public-private infrastructure contracts? The answer is no.

The 195-page LCA-Allentown contract (not counting any attachments) includes the same recursive language generally found in infrastructure privatization contracts. For example, it includes Article 14, the Adverse Action provision. In contract after contract, that section gives private contractors the right to reimbursement for claims that the public partner has done something that deprives the private "concessionaire" of anticipated revenues.

For example, Article 14 in the Virginia-Transurban/ Fluor Corporation HOT lanes deal requires the Commonwealth of Virginia to reimburse its private partner when the number of carpools (which did not have to pay a toll to use the HOT lanes) exceeded 24 percent of the traffic on the carpool lanes. Chicago has had to reimburse its parking-meter contractor for the contractor's claim of lost revenues when meters are bagged while street repairs are in progress. This is the case even though, before the meters were privatized, Chicago received no revenue from them while street repairs were being made. The effects of Article 14 mean that the private contractor can put a dollar veto on democratic control and public needs.

This is not the way true partners treat one another. So why did the LCA want to include such a term in its contract? Is the standard contract the only alternative?

In fact, Food and Water Watch promotes a different model - a PUP, a public-public partnership - that retains local and public control of existing water systems. This FWW report provides an overview of domestic and international PUPs and publicly owned water. Among the many models and resources are a crowd-sourced online book on international public water control and management, remunicipalization of water and resources from Water Justice, including information about reclaiming and protecting public water.
Ensuring adequate potable water is a major global challenge that will only increase. The United States is not exempt from this challenge. Indeed, we face the dangers of conflict, ecological disaster and widespread suffering. Rather than go down the path advocated by privatizers, which truly does put profits ahead of public needs, we need the power to protect this vital resource. The ink on the Allentown water contract is barely dry. It will take time to see how it and other domestic and international water systems fare. Our best hope is to persuade those entrusted with the Earth's water to see that their responsibilities are to promote our collective well-being.